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While global economies were drawing up plans to rebound from Covid-19 closures, the Russia-Ukraine conflict has derailed recovery prospects, creating new headwinds for Asian as well as world economies. Inflation in Asia has shown an uptick over the past few months, and the conflict in Europe will only exacerbate this.
Inflation had started showing its ugly side in Asia even before the Russian invasion of Ukraine — largely due to supply chain issues, rising demand, and high liquidity induced by government relief. However, these issues have now taken a backseat as sky-high oil prices are in the crosshairs of Asian central banks as they try to fend off rising inflation.
Apart from energy, the Ukraine-Russia war has also resulted in a steep rise in the prices of food grains, which some analysts believe could threaten global food security.
What’s happening in Asia?
Late last year, a report by the IMF noted that Asia’s inflation was more moderate compared to other regions thanks to the slow increase in food and energy prices. Overall, economists were optimistic about Asia-Pacific’s economic recovery after the pandemic. However, the Russian invasion of Ukraine has upended this outlook.
Crude oil prices have jumped in the past few weeks as fears of a short supply from Russia has caused panic among investors. Brent Oil Futures for June’22 series were trading at around $110 per barrel on Tuesday, as per data from Investing.com. Sanctions on Russia, the world’s second-biggest oil exporter behind Saudi Arabia, have knocked 2 to 3 million barrels per day of Russian crude off the market, said Ben Cahill, Senior Fellow at the Center for Strategic & International Studies.
Inflation is on the rise across the Asia Pacific, and some of the worst-performing countries are Sri Lanka, Pakistan and Uzbekistan, among others, which are seeing double-digit inflation figures. India saw its February inflation rise to 6.07% from 6.01% the previous month.
Analysts had hoped a revival of tourism will provide respite to Asian economies such as Thailand, but instead, the kingdom reported an inflation rate of 5.28% up from 3.23% the previous month.
High crude oil prices are at centre of inflation
Supply chain bottlenecks and rising commodity prices have added to Singapore’s inflation that increased by 30 basis points in February. “In the months ahead we will likely see core inflation crest 3%, which could prod more aggressive action from the Monetary Authority of Singapore (MAS),” ING had said in its weekly outlook report earlier in March.
South Korea is seeing a faster than expected inflation rate of 3.7%, and consumers expect prices to rise at their fastest rate since 2014, largely due to supply chain snags and high energy costs, reports Bloomberg.
China’s consumer price index increased 0.9% in February, in line with analyst expectations and consistent with the previous month. However, economists at Goldman Sachs expect China’s consumer price inflation to average around 2.5% in 2022, which is much higher than its current rate.
High crude oil prices are at the centre of inflation in Asia, eventually leading to high industry costs and a reduction in the real income of consumers. On the other hand, a tighter monetary policy to rein in inflation would mean a slowdown in the rate of economic growth.
Spillover effect of high Asian inflation
The IMF expects Asian inflation to peak during the second half of 2022. “If oil prices continue to increase and producer costs increase, it’s inevitable it’ll eventually come to the price of retail goods,” Changyong Rhee, Asia-Pacific Director for the IMF, told Bloomberg. “In that stage, Asia can export inflation further to the world, but it is not yet at that stage.”
The US Federal Reserve chair Jerome Powell recently said the central bank may increase interest rates by a half per cent to curb inflation, which could impact Asia negatively. “Higher global interest rates will definitely reduce the growth momentum in Asia,” Rhee tells Bloomberg.
Earlier this month, Fitch Ratings cut its 2022 world GDP forecast by 0.7 percentage points to 3.5% to reflect higher energy prices and a faster pace of US interest rate hikes. “We expect growth in emerging markets (EM) excluding China to slow to just 2.5% in 2022,” Fitch said in the report.
Global commodity prices were already under pressure in 2021 due to supply chain disruptions as well as higher demand from countries that were reopening. The Russia-Ukraine war has added this upward price pressure, and the high commodity prices will eventually be passed on to consumers and businesses, AMP Capital Economist Diana Mousina said. “…The risk with the current situation of high and rising commodity prices and potential further trade-related supply disruptions is occurring at a time of already heightened inflation.”
Brookings Institute in an article titled ‘Inflation could wreak vengeance on the world’s poor’ said that social welfare policies might be able to cushion the poorest from rising prices. It adds that central banks must consider the impact on poverty and inequality before taking any policy decisions.
